Central banks facing post-pandemic inflation often considered ‘looking through’ supply shocks. Using a New Keynesian framework in which agents gradually learn whether a cost-push shock is temporary or persistent, this column shows that such look-through strategies can amplify inflation when information is incomplete. In contrast, a standard Taylor rule prevents an additional demand-driven inflation impulse and dominates look-through in most plausible calibrations. When policymakers revise beliefs and lift off earlier once persistence becomes sufficiently likely, disinflation is faster – especially with steeper price and wage Phillips curves. The case for look-through survives only when the Phillips curve is very flat and society puts unusually high weight on output stabilisation.
After decades of low and stable inflation, the Covid-19 shock brought a rare combination of supply bottlenecks, energy price spikes, and strong demand (Caldara et al. 2022, Ascari et al. 2024). Many central banks initially treated the inflation surge as transitory and opted to ‘look through’ it, holding policy rates low in the hope that price pressures would fade (Powell 2021, Lagarde 2021). This stance trades off short-run output stabilisation against the risk of letting inflation expectations drift. Whether that trade-off is attractive depends not only on the shock itself, but also on how quickly the public and the central bank learn about its persistence. Central bank communication has long highlighted the case for ‘looking through’ temporary relative-price shocks while focusing policy on persistent inflationary forces (Lane 2015, European Central Bank 2021).
A simple framework
In a recent paper (Bušs and Guido 2025), we analyse a New Keynesian model with nominal rigidities in which the observed cost-push shock has two components: one transitory and one persistent. Neither households, firms, nor the central bank observe the decomposition, so all agents form beliefs and update them over time using the data they see. When a shock arrives, the central bank can either follow a standard Taylor rule or commit to a look-through regime that holds the policy rate unchanged for a fixed period before reverting to a rule. Monetary policy depends on the central bank’s perception of the cost-push shock. If it is perceived to be temporary, the interest rate is kept fixed (look-through policy), whereas if it is considered persistent, the central bank follows a standard Taylor rule. We evaluate policies by a quadratic loss that penalises inflation and output gap volatility, and we trace outcomes across different Phillips curve slopes.
What ‘look-through’ means in practice
Look-through is appealing when the shock is short-lived because raising rates would barely move inflation yet would impose real activity costs. But with incomplete information, the policy rate also shapes beliefs by changing the real interest rate and demand. If agents initially assign high probability to a transitory shock while the true disturbance is persistent, maintaining a low policy rate adds a demand-driven leg to inflation on top of the supply shock. This mechanism makes look-through risky precisely when it is most tempting.
What the model says
Under full information, committing to look through a transitory cost-push shock generally yields lower losses than following a Taylor rule, unless the wage Phillips curve is very steep. Under incomplete information, a look-through policy often performs worse because it fuels higher inflation through the expectations channel when the shock is in fact persistent.
We study the economy’s response to a persistent rise in production costs under two information environments: full information and incomplete information (Figure 1). Under full information, the shock immediately pushes up inflation. The central bank responds by raising the policy rate. This firm response eventually brings inflation down, at the cost of weaker output, which falls on impact and remains below potential for some time. Under incomplete information, the dynamics differ. Because neither the central bank nor the public can tell at first whether the shock is transitory or persistent, they initially treat it as temporary. As a result, the central bank maintains its look-through stance, keeping the policy rate unchanged for a time. This caution allows inflationary pressures to build as the real interest rate falls. Inflation begins to decline only once monetary policy reverts to a Taylor rule.
In benchmark calibrations, a Taylor rule dominates across a wide range of weights on output stabilisation and for realistic price and wage rigidities. Only when the Phillips curve is unusually flat and the loss function places at least half of the weight on the output gap does look-through retain an advantage, reflecting a very high sacrifice ratio (Hazell et al. 2022, Del Negro et al. 2020).
Figure 1 When look-through amplifies inflation under incomplete information
Notes: Black line: full information with a Taylor rule. Red line: incomplete information with a look-through commitment (no-change for eight quarters). The look-through stance lowers real rates on impact, lifts demand, and adds a demand-driven leg to inflation when the shock is in fact persistent.
Learning, credibility, and early liftoff
We study discretionary ‘early liftoff’ strategies in which the central bank updates its assessment of shock persistence each period and abandons the no-change regime once persistence becomes sufficiently likely (see also Erceg et al. 2024). Early liftoff reduces inflation faster than strict commitment to look-through, especially when price and wage Phillips curves are steeper. Among early liftoff options, switching to a more hawkish rule anchors expectations best and yields the lowest losses. If credibility is impaired or expectations are less forward-looking, switching to a standard or a backward-looking rule is the next-best response. Even so, none of the early liftoff strategies beats following a Taylor rule from the start in our baseline specifications.
Policy takeaways
Our work highlights several implications for monetary policymakers to consider when deliberating whether to look through a supply shock:
- Avoid treating look-through as a default response to supply shocks when information is incomplete.
- Communicate monetary policy based on data-dependent triggers rather than calendar time.
- Lean more aggressively when the Phillips curve is steeper, because the inflation-output trade-off is more favourable.
- Use policy rules that anchor expectations quickly; a more hawkish reaction function outperforms when persistence risks are elevated.
- Reserve look-through for cases with very flat Phillips curves and a social loss function that places unusually high weight on the output gap.
How this fits the debate
The 2021-2023 inflation episode illustrated how quickly supply shocks can bleed into broader price pressures once expectations adjust. Our results help rationalise why early rate increases were followed by faster disinflation in economies that pivoted decisively, while prolonged look-through stances risked a larger and more persistent inflation overshoot. The lesson is not that look-through is never appropriate, but that its safe use is narrow and depends critically on how agents learn about persistence.
Source : VOXeu
